One of the World’s Top Performing Fund is Suffering (INTERNALLY) with its Valeant Shares (New York Times)

“For more than four decades, the Sequoia Fund has been the envy of Wall Street, one of the rare funds to consistently beat the market. Known for its close ties to Warren E. Buffett, the fund at its peak managed more than $9 billion. It was in such demand that it closed to new investors in 2013, a move that only enhanced its mystique.”

“At its peak this summer, Valeant represented 32 percent of the fund’s portfolio, according to Sequoia, a hugely concentrated bet even for a fund like Sequoia, which invests in a smaller number of stocks than most funds.”

“From its inception in 1970 through the end of last year, Sequoia has been a top-performing fund, generating an annualized return of 14.5 percent a year, compared with 11 percent for the Standard & Poor’s 500-stock index.

Then came Sequoia’s infatuation with Valeant. The fund began buying the pharmaceutical company’s shares in 2010 and watched its share price rise inexorably as it bought existing drugs and raised their prices significantly, rather than trying to develop new drugs.”

“Valeant, in turn, has dragged down Sequoia. Over the last three months, shares of Sequoia, which trade publicly as an open-end mutual fund, have dropped 22 percent, while the S.&P. 500 has been flat. During October, investors withdrew nearly $100 million from the fund.”

“After Mr. Buffett closed his investment partnership in 1969, Sequoia, founded by his close friend William J. Ruane, was the one fund he recommended to his clients. (Mr. Ruane died in 2005.)”

“Berkshire is now its (Sequoia Fund) second-largest holding after Valeant, with the company’s two classes of shares representing nearly 13 percent of the portfolio.”

“Larry E. Swedroe, director of research at Buckingham Family of Financial Services and the author of several finance books, including one on Mr. Buffett, praised Sequoia’s track record but said its outsize Valeant position was an accident waiting to happen.“

“There’s no way Valeant could be considered a value stock,” he said. “Not at 100 times forward earnings.”

“At the insistence of the remaining three independent directors, Sequoia’s managers have agreed not to buy any more Valeant shares, even at current depressed levels. On Tuesday, its shares traded as low as $73.70, nearing its intraday low of $73.32 reached last week, the stock’s lowest price in more than two years.”

Article by James B. Stewart

Addendum*

-BIG TIME changed to INTERNALLY

-Sequoia said it still has a net gain on its Valeant position because its early purchases were at such low prices.